Accounting Standards I AS - 1 I Disclosure of Accounting Policies I Hasham Ali Khan I

Summary

In this educational video, Hashem Ali Khan delves into Accounting Standard 1, focusing on the critical aspect of disclosing accounting policies. He explains the significance of these policies in shaping financial statements and their impact on an organization's financial presentation. Khan emphasizes the necessity for transparency to enable accurate financial statement interpretation and comparison across different entities. He outlines the fundamental accounting assumptions, such as the going concern, consistency, and accrual, which underpin financial reporting. The video also touches on the selection criteria for accounting policies, influenced by prudence, substance over form, and materiality, concluding with guidelines for the disclosure of accounting policies in financial statements.

Takeaways

• 😀 The video is part of a series on accounting standards, specifically focusing on unit two which delves into the details of accounting standard one (AS1) - Disclosure of Accounting Policies.
• 📚 AS1 is crucial for understanding the financial statements as it outlines the specific accounting principles and methods applied by an enterprise.
• 🔍 The purpose of AS1 is twofold: to enhance the comprehensibility of financial statements and to enable meaningful comparison across different organizations' financial statements.
• 🏢 Fundamental accounting assumptions such as the going concern, consistency, and accrual are underlying principles that do not require explicit disclosure unless not followed.
• 📈 Accounting policies can vary widely and are influenced by the nature of the business, its transactions, and specific circumstances, necessitating management's prudent selection.
• 🛠️ Different methods for accounting treatments, like depreciation, inventory valuation, and goodwill calculation, are examples where enterprises might adopt varying policies.
• 📋 Disclosure of accounting policies is mandatory for all significant ones used in financial statement preparation and should be clearly stated in the notes to the accounts.
• 🔄 If a change in accounting policy occurs, its material impact on the current or future financial periods must be discussed, or if uncertain, this uncertainty should be disclosed.
• 📝 The video emphasizes the importance of a careful and concentrated viewing to grasp the intricacies of accounting standards, suggesting the audience to take screenshots of key points for reference.
• 🔮 The next video in the series will continue the exploration of accounting standards, moving on to accounting standard two.

Q & A

What is the main focus of the video by Hashem Ali Khan?

The main focus of the video is to explain Accounting Standard 1, which deals with the disclosure of accounting policies.

Why is the disclosure of accounting policies important according to the video?

The disclosure of accounting policies is important because it promotes a better understanding of the financial statements and facilitates meaningful comparison of financial statements between different organizations.

What are the three fundamental accounting assumptions that every business organization must follow?

The three fundamental accounting assumptions are the going concern, consistency, and accrual.

What does the 'going concern' assumption imply in accounting?

The 'going concern' assumption implies that the business is expected to continue operating for the foreseeable future and is not expected to be liquidated or cease operations in the near term.

What is the significance of the 'consistency' principle in accounting?

The 'consistency' principle in accounting requires that once an accounting method is adopted, it should be consistently applied from one period to another, ensuring uniformity in financial reporting.

How does the 'accrual' concept affect the preparation of financial statements?

The 'accrual' concept requires that all incomes and expenses related to the current period be recognized, regardless of whether the income is received or the expense is paid, ensuring that financial statements reflect the true financial performance of the period.

What are some examples of different accounting policies that can be adopted by an enterprise?

Examples of different accounting policies include methods of depreciation, valuation of inventories, calculation of goodwill, and treatment of contingent liabilities.

What are the factors that influence the selection of an accounting policy according to the video?

The factors that influence the selection of an accounting policy include the need to present a true and fair view of the financial statements, prudence, substance over form, and materiality.

What should be done if a business needs to change its accounting policy?

If a business needs to change its accounting policy, the impact of the change on the current period's income or expected future periods should be disclosed.

What is the purpose of disclosing accounting policies in the notes to the accounts?

The purpose of disclosing accounting policies in the notes to the accounts is to provide transparency and allow users of the financial statements to understand the basis on which the financial statements are prepared.

Why might a business not need to disclose certain fundamental accounting assumptions?

A business might not need to disclose certain fundamental accounting assumptions like going concern, consistency, and accrual if they are being followed; disclosure is only required if these assumptions are not followed.

Outlines

00:00

📚 Introduction to Accounting Standards

Hashem Ali Khan introduces the second unit on accounting standards, focusing on Accounting Standard 1 (AS1) which deals with the disclosure of accounting policies. He summarizes the content of the first unit, which covered the meaning, objectives, advantages, and limitations of accounting standards, the process of formulating these standards, a list of standards issued by ASB, and the need for conversion of Indian accounting standards to IFRS. The speaker emphasizes the importance of understanding AS1 for examinations, as it requires explaining the disclosure of accounting policies and their significance in financial statement preparation.

05:00

🔍 Purpose and Importance of Accounting Policies

The paragraph delves into the purpose of AS1, which is to enhance the understanding of financial statements by disclosing the accounting policies adopted. It explains that without such disclosure, users cannot comprehend the basis of financial statements. The speaker also discusses the necessity for consistency in accounting policies for meaningful comparison between different organizations' financial statements. Fundamental accounting assumptions such as the going concern, consistency, and accrual are introduced, noting that these are usually not disclosed as they are assumed to be followed unless a business explicitly states otherwise.

10:01

📈 Nature and Selection of Accounting Policies

This section discusses the nature of accounting policies, which are specific principles and methods adopted by an enterprise for financial statement preparation. It highlights that there is no single list of applicable accounting policies as they vary based on business circumstances and transactions. The speaker provides examples of different accounting policies in areas such as depreciation methods, inventory valuation, and goodwill calculation. The management's responsibility in selecting an appropriate accounting policy is emphasized, with factors influencing the selection including the nature of the business and its transactions.

15:01

📋 Factors Influencing Accounting Policy Selection

The speaker outlines the factors that should be considered by management when selecting an accounting policy. These include ensuring that financial statements present a true and fair view of the enterprise's state of affairs, adhering to the principles of prudence, substance over form, and materiality. Prudence involves recording expected losses but not gains, substance over form prioritizes the economic substance of transactions over legal form, and materiality requires the separate disclosure of significant items in financial statements.

20:02

🗒️ Disclosure Rules for Accounting Policies

The final paragraph focuses on the rules for disclosing accounting policies as per AS1. It states that all significant accounting policies must be disclosed in the notes to the financial statements, which should be an integral part of those statements. The disclosure should be consolidated in one section, and any changes in accounting policies that have a material impact on the current or future periods must be discussed. If the impact of a change in policy cannot be determined, this fact must be disclosed. Lastly, it mentions that while specific disclosure of fundamental accounting assumptions like going concern, consistency, and accrual is not required if they are followed, deviation from these requires disclosure.

Keywords

💡Accounting Standards

Accounting standards are a set of rules and guidelines that companies must follow when preparing their financial statements. These standards ensure consistency and comparability across different organizations' financial reports. In the video, the speaker discusses Accounting Standard 1, which focuses on the disclosure of accounting policies, emphasizing the importance of transparency in financial reporting.

💡Disclosure of Accounting Policies

The disclosure of accounting policies refers to the practice of revealing the specific principles and methods used in the preparation and presentation of financial statements. This is crucial for users to understand the basis on which the financial statements are prepared. The video script highlights that without such disclosure, users would not be able to comprehend the financial statements accurately.

💡Financial Statements

Financial statements are formal records that represent the financial position of a business, including balance sheets, income statements, and cash flow statements. They are prepared following certain accounting policies. The video underscores the significance of these statements in conveying an enterprise's financial health to stakeholders.

💡Accounting Policies

Accounting policies are the specific principles and rules adopted by a company for preparing its financial statements. These policies dictate how transactions are recorded and reported. The video script explains that different accounting policies can lead to different financial outcomes, affecting profitability and financial position, hence the need for their disclosure.

💡Fundamental Accounting Assumptions

Fundamental accounting assumptions are the underlying principles that form the basis for financial accounting and reporting. These include the going concern assumption, consistency, and accrual. The video mentions that while these assumptions are generally followed and not explicitly disclosed unless not adhered to, they are essential for the preparation of financial statements.

💡Going Concern

The going concern assumption is a fundamental accounting principle that assumes a business will continue to operate for the foreseeable future. This allows for the deferral and accrual of revenues and expenses. The video script explains that this assumption underpins the preparation of financial statements and is usually not disclosed unless the business is not operating as a going concern.

💡Consistency

Consistency in accounting refers to the use of the same accounting policies and methods from one period to another. This ensures comparability of financial statements over time. The video emphasizes the importance of consistency for meaningful analysis and comparison of financial performance.

💡Accrual

The accrual concept in accounting requires that revenues and expenses are recognized when they are earned or incurred, not when cash is received or paid. This is contrasted with the cash basis of accounting. The video script discusses how this concept ensures that financial statements reflect the economic events of the period they pertain to.

💡Materiality

Materiality in accounting is the concept that an item or event is only included in financial statements if it could significantly impact the decisions of users. The video script touches on the importance of materiality in determining what information must be disclosed to ensure the financial statements provide a true and fair view.

💡Prudence

Prudence, also known as conservatism, is an accounting concept that encourages accountants to anticipate potential losses but not to anticipate gains that are uncertain. The video script explains that prudence is one of the factors influencing the selection of accounting policies to ensure a true and fair presentation of financial information.

💡Substance Over Form

Substance over form is an accounting principle that emphasizes the economic substance of transactions over their legal form. This principle guides accountants to record transactions in a way that accurately reflects their economic impact, even if the legal form might suggest otherwise. The video script mentions this principle as a factor in selecting appropriate accounting policies.

Highlights

Introduction to Unit 2 on Accounting Standards by Hashem Ali Khan.

Explanation of Accounting Standard 1: Disclosure of Accounting Policies.

Importance of disclosing accounting policies for financial statement users.

Definition of accounting policy and its role in financial statement preparation.

Impact of different accounting policies on financial statement figures.

Purpose of Accounting Standard 1: To promote better understanding and facilitate comparison.

Fundamental accounting assumptions that underlie financial statement preparation.

Clarification on the disclosure requirement of fundamental accounting assumptions.

Nature of accounting policies and their dependence on business circumstances.

Examples of different accounting policies in areas like depreciation and inventory valuation.

Responsibility of management in selecting appropriate accounting policies.

Factors influencing the selection of accounting policy: Prudence, Substance over Form, and Materiality.

Final rules for the disclosure of accounting policies in financial statements.

Requirement to disclose significant accounting policies and their placement in financial statements.

Guidance on disclosing changes in accounting policies and their material effects.

Instructions for disclosing when the impact of a change in accounting policy cannot be ascertained.

Disclosure requirements for fundamental accounting assumptions if not followed by the enterprise.

Conclusion and预告 of the next video on Accounting Standard 2.

Transcripts

hello viewers so welcome to my channel I

am Hashem Ali Khan

now I am going to start the unit number

two in the subject accounting standards

the last unit number one four videos I

have completed the first video regarding

the meaning of accounting standard

objective advantages and limitations in

the first video second video what is the

process of formulation of accounting

standards what are the complete steps

required in formulating the accounting

standards then I have explained about

the list of accounting standards issued

by ASB and last fourth video I have

explained about the need for conversion

conversion of Indian accounting standard

with the IFRS what are the benefits of

this conversion

so all these things I have already

explained in the first unit now I'm

going to start unit number two in this

unit a number of accounting standards

I'm going to explain first of all in

this video accounting standard one that

is disclosure of accounting policies

that I am going to explain in the

complete video

in examination you will be asked to

explain accounting standard one

disclosure of accounting policies then

you have to write all these points I

have written the important points on the

board and I'll explain each and every

point in detail so watch the video till

the end don't skip in between

have some patience if you watch the

video with full concentration

with full interest then definitely you

can get a lot of command on this topic

of accounting standards take the

screenshot of the points which I have

written on the board then I'll explain

all the points

now as1

accounting standard one the title of

this accounting standard is

closure of accounting policies

what are the accounting policies the

first of all we'll discuss what do you

mean by accounting policies

accounting as one deals with disclosure

of accounting policies followed in

preparing and presenting the financial

statements

and preparing the financial statements

in number of policies principles have to

be adopted then what are the policies

principles adopted in preparing the

financial statement that should be

disclosed

if they are not disclosed the user

cannot be able to understand on what

basis the financial statements are

prevent that is the purpose of this as

one now accounting policies what is the

meaning of the term accounting policy

accounting policy refers to the specific

accounting principles

adopted by the Enterprise and the

methods of applying those principles in

the preparation and presentation of

financial statements the first line I

have given the meaning of the term

accounting policy

accounting policy of the specific

accounting principles which are adopted

by an Enterprise while preparing and

presenting the financial statement those

accounting principles are called

accounting policies now disclosure of

accounting policy are important as

different accounting policy can result

in different amount being presented in

the financial statements the different

policies will give different amounts

when different amounts are taken in the

financial statements the income the

profitability the position will change

that means the values in financial

statements depends on the treatment of

the accounting policy Which accounting

policy we have applied on that basis the

amount will depend

next also different organization may

follow different policies and comparison

of financial statements of two

organization will not be meaningful

see we don't have a single one method of

accounting policy we have different

methods of accounting policy

some follows one method the other

business will follow another method so

when different businesses follow

different accounting policies then

definitely the financial statements will

show different amounts

then what will happen we cannot be able

to make the comparison

comparison will be different will be

difficult because different

organizations are following different

policies

then is clearly by the user accounting

policies are normally disclosed in notes

to the accounts

whenever we prepare the financial

statements we will we should have some

notes in those notes two final accounts

in those notes we have to specify what

are the accounting policies we have

adopted while preparing the financial

statements

these are the basic points you have to

write next one is purpose why this

accounting standard one disclosure of

accounting policies is made what is the

purpose the first purpose is to promote

better understanding of the financial

statements

so when we clearly disclose what

accounting policy we have adopted then

understandability of financial statement

will increase the user of financial

statement can easily understand the

financial statements if he is provided

the method the policies then secondly to

facilitate meaningful comparison of the

financial statements of different

organizations nowadays in order to check

whether our business is going better or

not we have to compare our performance

with the competitors performance the

other organization's performance the

comparison is possible

only

when both the businesses follow the same

method of accounting or same accounting

policies simple example if you want to

compare the height of two persons both

should stand on the same platform if one

person is standing on the ground and

another person is standing on the chair

can we be able to compare prudently

compare the height no because both are

not standing on the same ground

similarly when we compare two

organization's performance both

organizations must follow the same

accounting policies

so to facilitate comparison we need to

disclosure of accounting policies so

these two are the purpose now

fundamental accounting assumptions

some accounting assumptions are there

which are fundamental basic every

business organization must follow those

fundamental accounting assumptions what

are those now I am going to explain

certain fundamental accounting

assumption underlie the preparation and

presentation of financial statements

whichever organization whenever they

make the financial statements they have

to follow

some basic fundamental accounting

assumption every business organization

must follow those assumptions and they

are usually not stated because they are

acceptance and usage are assumed

fundamental accounting assumptions need

not be disclosed the business should not

declare that we are following this

fundamental accounting assumption no

it is assumed that every business is

following certain fundamental accounting

assumption huh if it is not following

then it has to specify that our business

is not following the fundamental

accounting assumption if following no

need of disclosure

because accounting standard one requires

that an organization which is not

following this assumption must disclose

the fact to all its stakeholders

if they are not following then only it

has to declare disclose otherwise if the

organizations are following no need to

declare so what are those fundamental

accounting assumptions

there are three fundamental accounting

assumptions they are going concern

consistency and accrual these three are

called fundamental accounting

assumptions which every Enterprise will

follow and it is not required to be

disclosed it is understood assumed

her first one going concern concept

according to going concern concept the

accounting should view should imagine

should assume that this business is

going to continue for a long period of

time there is neither the necessity nor

the intention of the owner to stop the

business the business is not going to be

stopped in the very near future the

business is going to continue for a long

period of time that is the assumption on

that assumption only the accounting is

made secondly consistency consistency

means uniformity whatever accounting

methods practices We are following the

same method should be continued from one

year to another year

method should not be changed

once a method is adopted the same method

should be continued that is consistency

huh if the method is changed then

disclosure is required accrual

according to a cruel concept all the

incomes and expenditure relating to the

current period should be taken whether

the income is received or not whether

the expenditure is paid or not all the

incomes and expenditure relating to the

current year only should be considered

for that purpose only any outstanding or

prepaid should be adjusted

the outstanding expenditure should be

added similarly the prepaid expenditure

should be deducted

outstanding income should be added

income received in advance should be

deducted so all these adjustment we are

making because we have to follow a cruel

system

so these three are called fundamental

accounting assumptions

now nature of accounting policies

so accounting policy refer to the

specific accounting principles and

methods of those principles adopted by

the Enterprise in the preparation and

presentation of financial statements

already in the beginning I told you

about the meaning of the term accounting

policy

it refers to specific accounting

principles which are adopted by an

Enterprise

while preparing and presenting the

financial

statements now there is no single list

of accounting policy which are

applicable in all circumstances remember

there is no exhaustive list of all the

accounting policy we have innumerable

accounting policies

now the accounting policy depends on the

circumstances on the nature of the

business on the nature of the

transactions then this is because

different organizations operate in

different situations

the nature of business is different the

method of running the business is

different so we cannot say the same

accounting policy will be adopted by

every business organization simply we

can say a doctor cannot prescribe the

same medicine for every patient because

every patient is different one the

nature of disease of every patient is

different so how the doctor can be able

to prescribe the same medicine no it

differs same is the case with accounting

policy the nature of the business is

different the needs of the transaction

is different

so there are we are innumerable

accounting policies now it is a

responsibility of the management to

select an appropriate accounting policy

ultimately

it depends on the management to select

and appropriate accounting policy for

our business now some of the examples

were different accounting policies now

what are the areas or what are the

transactions on which we have different

accounting policies

first example is method of depreciation

you might be knowing that depreciation

we have different methods called

straight line method diminishing balance

method annuity method sinking fund

methods sum of digits number method

and machine or method revaluation method

different methods of depreciation are

there

so we cannot say always straight line

method is good or not always diminishing

balance method is good

now it depends on the nature of the

business

so we have different options available

for valuation for methods of

depreciation similarly valuation of

inventories we can value the inventory

at cost basis or market value basis or

whichever is lower basis the different

methods of accounting are there for

valuation of inventory similarly

valuation of Goodwill how to calculate

the Goodwill of a business we have

different methods average price method

super price method capitalization method

so many methods are there every method

will give you a different amount of

Goodwill next one is validation of

Investments then valuation of fixed

assets treatment of contingent

liabilities few examples I have given

where we don't have a single method we

have different types of method the

business has to select the management

has to select any one of the method of

accounting and same method should

consistently be adopted every year

that's all now factors influences in

selection of accounting policy just now

I told you the management is responsible

for selecting an appropriate accounting

policy now on what basis he has to

select it does not depend on the will of

the management some factors should be

considered while selecting the

accounting policy so what are the

factors first of all the primary

consideration in selection of accounting

policy should be to prepare and present

financial statement in such a way that

they represent a true and Fair View of

the State of Affairs of the Enterprise

the only thing to be remembered by the

management is while selecting the

accounting policy the policy should be

such that

the financial statements should show the

true and Fair View of the State of

Affairs of the business that means the

financial statement consists of profit

and loss account

the profit and loss account should show

the true profit earned during the year

similarly the statement of financial

position that is called balance sheet

the balance sheet must show the true

financial position as on the last date

so keeping in mind that the financial

statement should show the true and Fair

View we have to select an appropriate

accounting policy

the management of each Enterprise must

select appropriate accounting policy

keeping in view of the three major

consideration

three major considerations the

management must keep in view

considering these three factors

then only we have to select an

appropriate accounting policy what is

the first Factor the first factor is

prudence

the meaning of prudence is record all

expected losses but don't record any

expected gain

the accountant should be prudent in

recognizing the income and expenditure

The Profit should not be overstated

neither The Profit should be understated

that means all expected losses and

expenses should be recorded

but any expected gain should not be

recorded that is according to Prudence

next second one is substance over form

this is the second consideration to be

kept in Mind by the management in

selecting an appropriate accounting

policy substance overfall the accounting

treatment and presentation of

transaction and even should be governed

by the substance and not merely by the

legal form

that means while deciding which policy

we are to adopt the management must go

into the substance of the transaction

the management simply should not depend

on merely the form legal form third

materiality

financial statements should disclose all

material items separately it should not

be clubbed with any other item simply

all significant items or material items

should be separately disclosed so these

three considerations

the management must take into account

while deciding the accounting policy

first one Prudence second substance over

form and third one is materiality that's

it now next thing is disclosure of

accounting policy the last topic of this

video in this uh as1 is the disclosure

of accounting policy the final rules for

disclosure of accounting policy first of

all

all significant accounting policy

adopted in the preparation of financial

statement should be disclosed first

point

in examination you must write these

final points these six points the first

final Point all significant accounting

policies adopted by the Enterprise in

preparing the financial statement should

be disclosed

should be disclosed in the notes

secondly such a disclosure should be

part of financial statements

that means whatever disclosure you are

making in the notes that note should be

a part of the financial statements

thirdly they shouldn't be disclosed at

one place

all the accounting policies should be

placed at one at one point it should not

be scattered then any change in the

accounting policy which has a material

effect in the current period or which is

expected to have a material effect in

later period should be discussed

if a business is required to change the

accounting policy

that means the circumstances are such

that the management has to change it

then what this as one says as1 says if a

business wants to change the accounting

policy then what would be the impact of

this change on the income of the current

year

or what it will have the change in the

future expected future years what is the

effect of the change in the accounting

policy

the next fifth point is the impact of

the change in policy cannot be

ascertained

if the impact if the impact of the

change in accounting policy cannot be

ascertained it is not us it cannot be

ascertain then in that case a fact

should be given that the impact of the

change is unassertainable

it cannot be asserted that fact should

be written in the disclosure then last

one if the fundamental accounting

assumption namely going concern

consistency and accrual are followed in

financial statements specific disclosure

is not required if they are not followed

then disclosure is required

certain fundamental accounting

assumptions like the fundamental

accounting assumptions like going

concern consistency and accrual these

three fundamental accounting assumptions

if it is followed no need to disclose

no need to write that we are following

going concern We are following

consistency We are following accrual no

need to disclose huh if a business is

not following those fundamental

accounting assumption then it has to be

disclosed that's all so I have explained

all the points regarding as1 accounting

standard one disclosure of accounting

policy in the next video I'll start the

next accounting standard that is

accounting standard two